Liberals go again on the lease variation tax

It seems a simple enough premise. If people buy land with one lease purpose, at a value to suit that purpose, they get a windfall if the Government agrees to vary the lease purpose to something more lucrative.

Rather than bank the money from having an amenable government it seems manifestly self evident a part of that windfall should be returned to the Government.

But the developers want it all and the Liberals’ Brendan Smyth agrees.

“The lease variation tax is a bad tax, as it stymies redevelopment proposals, and this latest data reinforces how this tax is failing to realise the expectations the Labor Government has placed on it,” Mr Smyth said.

“The Labor Government has put a lot of emphasis on the potential for the lease variation tax to raise additional revenue and yet we have seen that this potential has not been realised.

“First, there was the dismal performance of this tax during the last financial year – when it only raised $8.7 million after the Government budgeted for revenue of more than $22 million.

“Now, during the first quarter of the new financial year, the lease variation tax has again failed to live up to expectations.

“While the Government budgeted for $5.9 million in revenue from this tax, the actual revenue was only $1.3 million.

“This is another example of Labor’s budget falling apart around them, and another example of failed Labor Party tax reform. This revenue shortfall will need to be covered somehow.

But is it just about whatever money it brings in? Or the broader principle?

OK here goes with contributing for the purpose of spurring an intelligent discussion on RA (wish me luck).

The previous system, before the introduction of Lease Variation Charge (LVC) was Change of Use Charge (CUC). The CUC worked by starting with the value of the land before the crown lease for that land was varied (ie, the value of the land if it could only be used for say, 1 dwelling). That was ‘Value 1 or V1.

You then work out the value of the land after the Government changes the ‘use’ clause to allow, say, 9 dwellings (units). This is Value 2 or V2.

The CUC tax was the difference between V1 and V2, multiplied by a percentage. That is, the tax would be the difference in value, but only a percentage of the increase. Often that percentage was 50%.

I know what you’re thinking – if the developer is getting an increase in value of, say $100K, why shouldn’t it pay the Government for that total increase in value? Why should he only pay 50% of that? Well the answer is that if you charge the developer the full increase in value, the profitability disappears from the venture and the developer decides not to undertake the development. This is bad for the Government as the Government doesn’t get to collect stamp duty on the 9 units that would have been built. It is bad for the people, after all there is a housing affordability problem and we need to stimulate development blah blah blah. Therefore making the developer pay half of the increase worked for everyone, the Government collected some tax for the increase in value it gave the developer by allowing 9 units, the people got some money (through the Government tax), the developer undertook the development because it was still profitable, the Government collected more money on stamp duty for the 9 units when sold off, the people got 9 cheap one beddie units to reduce the housing affordability issue. Everybody wins right?

No, not according to some experts who decided that developers were taking the Government for a ride and profiting millions at the behest of the Government and the people (won’t someone think of the children). So these experts came up with codification. What that does is codifies (who’d have thought) the system with tables so you can look up a suburb (or part of a suburb) in the table, and say ‘if I want to increase the ‘use’ of my crown lease from 1 dwelling to 9 dwellings, it will cost me $X per unit in that suburb’. That way it is clear to everyone from the get go. Make sense? Sure does.

So why are developers whinging?

Answer: Because the tables increased the cost of development by such a significant factor that a great number of developers have decided not to proceed with their porposed developments.

End result: less building work, less new dwellings, less affordability, less stamp duty for the Government, whingy developers because they can no longer turn a profit on a unit complex in inner suburbs where the codified tables have made what would have been a $10,000.00 CUC tax into a $2 million LVC tax.

So, does the above apply across the board? Absolutely not. The above is the viewpoint of many in the property industry, but there are examples where people have in fact paid less under the new LVC system rather than the old CUC system.

The Liberals are harping on it now because the same ‘experts’ that came up with the codified tables told the Government that changing the tax from $10,000 for a development to $2 million wouldn’t stifle development. They said ‘do it Government, you will collect oodles of money from the developers because they will still develop and just pay the tax’ and the Government believed this and budgeted on collecting $22 million.

Unfortunately the truth is the Government may have been a little quick to take the advice of the experts, because instead of collecting $22 million they only got $8.7 million.

Liberals position: The new LVC system has brought such high cost to development that development has been significantly stifled, evident in the fact that the Government was expecting such a high rate of development and LVC tax, but in fact the Government has collected such a small amount of the expected LVC tax, which therefore proves that development has been stifled by this horrible new tax.

When a block gets subdivided and redeveloped, the government gets stamp duty for each of the dwellings that is sold, and a larger ongoing income stream because the owner of each unit is paying rates rather than just the owner of one or two dwellings previously.

I’m still not quite sure why it’s manifestly self-evident that the government should get a fee like this on top of all that extra revenue. After all, what does the government actually do to facilitate the subdivision? Stamp a few forms? It should charge the cost of its bureaucrats’ time, and no more.

IMO, the concept of the betterment tax or improvements tax (or whatever you want to call it) is sound and fair.

They just got greedy and pushed the tax up so much that the risk profile of a development is no good.

Worst part is, the risk profile will only change the next time house prices begin to go crazy again, and developers can be assured of profiting no matter what. So the tax will be procyclical – in these circumstances it will make an expensive thing more expensive by adding to the cost base.

Its difficult to argue just how much it affects developments, just like the federal MRRT.
Companies will always want to make money. When a government affects their profitability they claime they won’t build/develop stuff, but in some ways the only way to make more money now is to build/develop more stuff!

Plus when politics comes into it, you have to decipher left and right wing propoganda on the subject.
The same can be said of removing stamp duty and increasing rates. How will this affect developments. Will more people invest in Canberra because of the lower initial costs and then claim the rates on their negative gearing?

Seems reasonable, but will that happen as well? Onbes political persuasion will argue for or against these kinds of things.

Actually, I reckon that if there is a lease variation/betterment then the owners of the surrounding land (where that lease has not already also been varied or who purchased prior to the zoning change that allowed the betterment) should get some compensation. Why should I, as the land owner, have to put up with 9 units next to me with no compensation? I fully accept that infill is required; but basically its being done at the expense of people who already own land in that area and purchased the land prior to zoning changes.

So my view is – have a tax but give some of it to surrounding land owners (even if the ‘compensation’ is the ability to purchase a new house at no or lower stamp duty), allowing you to move away from the 9 units next door to somewhere more amenable.

And dont say ‘oh, but your land is now worth more, thats your compensation’. Firstly its only worth more if I want to sell it (because I am not a developer and dont have the business/skills to be a developer) and its only worth more if the land value is proportionally high in comparison to the value of the house (because redevelopers will knock the house down, so its of no value to them). And in the interim, the greater ‘value’ of my land means I pay higher rates.

Its difficult to argue just how much it affects developments, just like the federal MRRT.
Companies will always want to make money. When a government affects their profitability they claime they won’t build/develop stuff, but in some ways the only way to make more money now is to build/develop more stuff!

Further to that, a fairly obvious point – the tax take would have been reduced due to lower construction/development activity anyway. Hard to know how much of the reduction is due to this effect and how much is the tax.

But of course, plenty of opportunity to spin the outcome strategically and use it to oppose the tax.

Actually, I reckon that if there is a lease variation/betterment then the owners of the surrounding land (where that lease has not already also been varied or who purchased prior to the zoning change that allowed the betterment) should get some compensation. Why should I, as the land owner, have to put up with 9 units next to me with no compensation? I fully accept that infill is required; but basically its being done at the expense of people who already own land in that area and purchased the land prior to zoning changes.

So my view is – have a tax but give some of it to surrounding land owners (even if the ‘compensation’ is the ability to purchase a new house at no or lower stamp duty), allowing you to move away from the 9 units next door to somewhere more amenable.

And dont say ‘oh, but your land is now worth more, thats your compensation’. Firstly its only worth more if I want to sell it (because I am not a developer and dont have the business/skills to be a developer) and its only worth more if the land value is proportionally high in comparison to the value of the house (because redevelopers will knock the house down, so its of no value to them). And in the interim, the greater ‘value’ of my land means I pay higher rates.